Forecast

AIG takes $832 million charge on death bets as hedge funds gain

American International Group Inc. suffered another year of impairments in its portfolio of death-benefit bets as insured people lived longer than the company expected.

AIG recorded an $832 million impairment on its life-settlement holdings in the fourth quarter, bringing the total for 2013 to $971 million before taxes. In life settlements, AIG buys insurance policies from individuals and pays premiums until they die, when the company collects the payout. The arrangement becomes less profitable for AIG the longer the person survives.

The charge on the death bets "was prompted by the continued underperformance relative to our mortality assumptions," Chief Financial Officer David Herzog said on a conference call with analysts Friday. "We revised our future mortality assumptions."

AIG relies on investments to generate profits after years of losses from underwriting property-casualty policies. The company announced Thursday that it was cutting 3 percent of its staff, with the reductions mainly at the P&C unit. The impairment was a blemish in a quarter when hedge-fund performance improved along with results at the unit that offers retirement products.

Hedge funds generated $447 million at the life and property-casualty businesses, almost triple the contribution in the last three months of 2012. Investments helped AIG post earnings Thursday that beat analysts' estimates.

"The net investment income beat mostly stemmed from volatile sources like alternative investments," Meyer Shields, an analyst at Keefe, Bruyette & Woods, said in a research note. "We view the quarter as modestly disappointing."

Herzog said Friday that AIG expects returns on its life settlements in the "mid-single digits." The company held $3.6 billion of life settlements as of Dec. 31, down from $4.36 billion a year earlier, according to a document on AIG's website.

Holdings of alternative investments such as private equity, hedge funds and the life contracts fell 1.6 percent to $28.7 billion as of Dec. 31. AIG's total portfolio, valued at more than $350 billion, is mainly invested in bonds.

AIG recorded $309 million of impairments on its life settlement portfolio in 2012 and $312 million a year earlier, according to its 2012 annual filing. AIG began using more medical information in 2011 to update the value of the contracts, the company said in the 2012 filing.

"Where updated information indicates that an individual's health has improved, an impairment loss may arise," AIG said in the filing.

Investors like AIG gain if the death benefit exceeds the purchase price and cost of maintaining a policy. The value of the contracts is reduced when AIG determines that a person will live longer than expected.

The secondary market for U.S. life policies emerged in the 1980s when the AIDS epidemic led some patients to sell their insurance policies to pay for treatment.

Investors have been "skittish" about investing in life settlements, amid concerns over the difficulty of selling the contracts, according to a 2013 report from Conning & Co., a Hartford-based research firm.